BT : Foreign fund flows into Asia equities back to 2007 levels

Published December 7, 2009

Foreign fund flows into Asia equities back to 2007 levels
China is biggest magnet, followed by Hong Kong and India


By NEIL BEHRMANN
IN LONDON

FOREIGN flows into Asian equities are back to 2007 boom levels, albeit in recent weeks they have begun to abate.



Market interest: According to MSCI indices, emerging Asian markets have soared by a whopping 93 per cent in the past 12 months

The Dubai crisis, growing market volatility, exceptional gains and consequently unexceptional value, have made foreign investors wary. China has been the inflow leader by far, but Japan is still experiencing large net outflows from its equity market, although the size of the sales is declining.

Data from EPFR Global shows that net global fund inflows into China equities reached US$11.9 billion, year to date to Dec 2.

This exceeds net inflows of US$2.7 billion in 2007 and is a massive reversal of the US$3.6 billion net outflows in 2008. The equity holdings of global funds in China have soared to US$134.7 billion at the beginning of December, beating the October 2007 heights of US$130 billion and treble the levels of China's bear market lows a year ago. Similar flow trends are apparent with Hong Kong and India.

In comparison, flows to Singapore have been more conservative. After net inflows of US$2.3 billion in 2007, there were net outflows of US$2.5 billion in 2008, but net inflows of only US$820 million so far this year.

Following steep net outflows in 2008, the reversal of increasingly bullish foreign fund managers has played a significant role in boosting equity prices in the region.

Therein lies the danger of a market setback, as any foreign withdrawal from markets, has in the past caused sharp share price declines. Experienced analysts note that in emerging markets, it has been proven time and time again that the safest strategy is to 'sell too soon', in other words, curb greed and take profits while the markets are still rising. Emerging markets do not have the liquidity and trading depth of Wall Street, London and Tokyo, so it is difficult to exit after they peak.

Emerging market, mutual, pension and hedge funds that poured money into Asia, Eastern Europe, Latin America and Africa, caused share and bond prices to soar to unexpected heights in previous bull markets. But they soon found that it was far easier to enter an emerging market in an upturn than to sell in weak markets after they peaked.

According to MSCI indices, emerging Asian markets have soared by a whopping 93 per cent in the past 12 months ie from levels around the region's bear market nadir.

China is up by 82 per cent. Following such a surge, foreign fund managers who tend to buy the larger well known companies, are now finding it difficult to pick bargain stocks. China's price earnings ratio is 19, according to Thomson Reuters, Hong Kong's Hang Seng index is 21; Singapore, 19; South Korea, 18; Taiwan, 28; and India, 22. Smaller markets such as Malaysia, Indonesia and the Philippines are also trading on PEs of near 20.

Japan has appreciated from its low point, but the total net outflows since the beginning of 2007 have been a staggering US$35 billion, according to EPFR Global data. Foreign investors are concerned about deflation and the high yen, but contrarians are beginning to seek value in Japan which has experienced good rallies in the past.

Global fund holdings have shrunk to US$92 billion at the beginning of December compared with US$155 billion in January 2007. A deterrent, given the uncertain earnings prospects, however, is the historic PE of 33.

Despite the above concerns, the majority of investment bank strategists favour Asia in 2010 on the grounds that interest rates will remain low and profits will head northwards.

Bears such as Templeton Asset Management chairman Mark Mobius warn that Asia and other emerging markets are overbought and are due for a setback. Dubai is a warning signal, he believes.

Besides Dubai, Dr Mobius expects a wave of initial public offerings that will add to the supply of shares and cause a downturn in the markets.

Another crucial factor is the outlook for the US dollar. The vast majority of dealers and currency analysts are expecting a further decline in the US unit. As a result, hedge funds and other players have borrowed the greenback to place money in emerging markets and risky assets such as commodities.

A sharp rise in the dollar last Friday, following better than expected US employment figures, was a warning signal that an oversold dollar could easily rally, forcing the currency speculators to reverse their positions. The fallout could hit emerging markets, some analysts warn.